Well that was certainly a wild start to the week, wasn't it? Over the last few days we've seen the S&P 500 drop about 300 points, bounce up 200, and now as I'm writing this we're finally looking a bit calmer around the 2700 level. I also have been actively trading the Nasdaq 100 (NQ) which is naturally quite volatile so you can imagine how crazy a ride that has been!

This hyper-volatility and market craziness isn't something that comes around often. Sometimes we can go years without seeing these kind of events. Slow and steady moves to the upside with low volatility is pretty much the type of market we've been in throughout the bull run. However, these kind of corrections always happen eventually and they are rarely subtle. The markets tend to go from periods of low volatility to periods of high volatility without a transition period between them. It's not a question of IF it happens, it's just a question of WHEN.

Called It... Sort Of

In fact, I was just talking about this in a post only two weeks ago which talked about the possibility of increased market volatility in the new year. To be fair, I also said in that post that I wasn't going to try and time the correction and it may happen in weeks or months, but it was certainly due at some point. The main thing I was getting at was simply that a trader needs to always be prepared for shifting conditions because things can happen very quickly as we've seen.

For those that were unprepared things likely didn't go too well! As they say, "bulls make money, bears make money, and pigs get slaughtered" so those that controlled their risk and prepared for the turn likely did just fine but the greedy ones probably took a major hit. That likely includes those who watched the market switch into extremely volatile conditions and tried to push their luck by over-trading it.

A Little NQ Trading Before Mayhem Breaks Out

In terms of market activity the week started pretty normally. The only thing that was really out of the ordinary from my perspective was that I was sitting down to do a bit of Nasdaq 100 (NQ) trading on Monday as I typically take Mondays off. What can I say, I like my regular long weekends!

Things have been a bit different recently though as I've been pouring time and effort into trading research and development of an NQ strategy which needs to be tested extensively in a live environment as well. That meant focusing a bit of extra time on the NQ with only the occasional glance at the ES charts.

I wasn't planning to trade for long as NQ is pretty much always active and volatile which means you can typically find plenty of good trades in a small window of time if you have a strategy to capture them. The flipside of this is that the extra swings in NQ can lead to over-trading and it can be more difficult to manage your risk and keep stops small. This is kind of outside the scope of this post though, so more on my NQ trading to come later...

In these charts you can see some of my trades from Monday morning. These charts may look a bit different from what you've typically seen on the Samurai Trading Academy blog but it's still fairly straight-forward stuff. I simply read the structure and flows on a 1000 Tick chart then trade high-value areas using VWAP curves on a 100 Tick chart once market sentiment shifts in my favor. It's not too complicated and is remarkably efficient with a very strong positive trading expectancy but, of course, that doesn't mean it's actually easy to do in real-time.

After a handful of these trades and banking a substantial haul of ticks I took a break from the screens. Upon coming back I saw that the bottom had completely fallen out of the market and price was flying to the downside in ES and the NQ. Instead of chasing it I decided to just call it a day to let the market craziness play itself out.

A Wise Approach During Wild Market Events

I certainly didn't over-trade the day and if anything it was probably the opposite. I scaled back and barely traded at all. Why? Because I knew that we were experiencing a highly unusual and statistically infrequent market event that couldn't be effectively captured by my trading system.

That's rule number one of being a trader - protect your account at all costs! Volatility is a great thing for traders as a general rule but just like dosing a medication effectively, too much of a good thing can turn bad very quickly.

When market conditions go so far outside the norm that your carefully constructed trading approach can't adapt to the technical picture and price movement, does it really make sense to take on extra risk and place more trades?

My trading system is something that can be applied 99.9% of the time because it's built around regular market structure and price moves that occur over and over in the markets. But when those typical 3 to 6 point swings turn into 20 to 30 point swings it's simply not going to be able to put method to the madness. I'm better off standing aside to let the over-excited gamblers have their fun (or more likely, to let them learn their expensive lesson).

After all, those hyper-volatile conditions are so unusual that it makes it incredibly difficult to put a technical structure around them that can be traded with a highly repeatable edge. How can you really test your trading plan thoroughly in a market environment that happens so infrequently and has such erratic movement? It just makes sense to wait for when conditions fit my trading plan where I can have full confidence that my well-tested trading edge will play out.

Trading the News

I liken this kind of market to a major news release. Generally, my trading method avoids trading right around the big, high impact news releases. So if we have ISM Non-Manufacturing PMI at 10:00AM EST then I won't trade a few minutes before the release and I'll wait a few minutes after the release before looking for setups to allow time for the extra volatility and volume to work itself out.

Unless you're someone with a strategy specifically geared towards trading the news it's best to avoid those releases because they introduce extra risks and unusual events that aren't going to fit your structured trading plan. Slippage can also become an issue in market conditions like this which is not something that Emini S&P 500 (ES) traders usually have to deal with.

It was no different with the recent market madness. Things were so extreme that it was basically one big news event that lasted hours, even days, instead of minutes. I have no problem sitting on my hands and waiting that out until the market calms a bit and starts to create a clearer technical picture. When chaos rules the best approach is often to stand aside and observe. That applies to news releases, whipsaw markets, or even major market volatility such as this.

Getting Back to Normal

With the major moves out of the way we're starting to find some normalcy again as we get into the middle of the week. As I wrap up writing this post it's Wednesday afternoon and I traded this morning in both the NQ and ES as normal. The market is still volatile and the swings are large but it's nowhere near the chaos we saw only a couple of days before.

It's important to keep in mind that this kind of correction isn't actually unhealthy in the markets and it's not that unlikely for there to be more to come. We've spent a LONG time in a bull trend which leads to complacency, so when things eventually shift there's always going to be a bit of panic and extra emotion involved. Stay calm, stay sane, and protect yourself first and foremost!

And remember, trading is about more than just entering and exiting the market all day long. It's about planning, knowing your edge and having confidence in your ability to execute it, and making sure that conditions are right before pulling the trigger. There's no reason to force anything just because the market is flying!

Wait for the setups that follow the structure of your plan. They will come if you're patient, and so will the profit.

Cody has over a decade of experience day trading the Emini S&P 500 (ES) and Forex markets and has worked personally with dozens of traders to help them achieve consistent profitability and make trading a full-time career.

This is really interesting to see how crazy things can get. Aren’t you tempted to sometimes just go for it and take something and try to run it for a load of points? There just seems to be so much available that even if you take a loss sometimes you can make big profit. It might be worth it.

Tempted? Sure. There’s always something deep down that wants to take that chance and try for the huge run. I know that’s not a good idea though and it won’t fit my trading framework that is tested and I’m confident in, so I’d rather wait for more optimal trading situations. In the end all that matters to me is consistency and profitability, and usually taking bigger risks or trading off hope and greed mean less of the former and only rarely achieving the latter.